Should you jump on the infrastructure fund gravy train?

India is hungry for growth. Its galloping infrastructure spending attests to that. A record-high budgeted spend of over Rs 11 lakh crore has been carved out for FY25. Investors naturally hope to pocket the expected gains from this structural play and infrastructure mutual funds are one such vehicle for them to do so.

So, are these funds really worth your money? Let's take a deep-dive.

Where do infrastructure funds invest?

India's infrastructure goes beyond just roads and bridges, it includes sectors such as transportation, energy, water and sanitation, communications, social and commercial infrastructure. Infrastructure funds invest across these lines to capture the broad array.

How many infrastructure funds are there?

There are 16 sectoral and thematic infrastructure funds at present, two of which are passively managed. These track the Nifty Infrastructure Total Returns Index (TRI).

The rest are actively managed, benchmarked against the Nifty Infrastructure TRI and the BSE India Infrastructure TRI.

What are the risks involved?

• The infrastructure theme is loosely defined.
  This is because fund managers can be seen investing in allied sectors (automobiles, financials, capital goods) not closely aligned with the core infrastructure space.
  As such, some funds have less than 10 per cent allocation in pure infrastructure companies.
  In other words, some infrastructure funds can be misleading.
• Many sectors under the infra theme are capital intensive, requiring large investments. Such companies often operate on thin profit margins and carry debt burden.
  This means heightened risks of defaults.
  Key sectors like construction and energy have seen major delinquencies in the past (IL&FS, Suzlon Energy, Jaypee Infratech, Lanco Infratech and DHFL). The two sectors also face risks of regulatory changes, project delays, economic instability, legal disputes and logistical issues.

Past performance

The historical performance of these funds fails to depict a clear picture as they don't necessarily stick to companies core to the infrastructure theme. For instance, four of the five top funds (in terms of AUM) had the highest allocations to sectors that don't strictly fall in the broad infrastructure space over the last five years.

Moreover, on comparing them against the S&P BSE 500 TRI, we found these funds have mostly underperformed in the last 10 years. The margin of underperformance was even higher in the previous decade (2004-2014).

Note that some of these funds have been in existence for longer than a decade, allowing for an extended performance analysis.

What you should do

1. Investors should take into account their risk appetite and investment objectives before investing in infrastructure funds. This is because many sectors under this theme are cyclical in nature, making them prone to high volatility.
   
2. Many companies in the ancillary sectors such as aviation, real estate, power, and telecommunications often carry heavy debt and are prone to financial stress.
   
3. Such financial challenges may also compel fund managers to include companies only loosely related to infrastructure. This can weaken the fund's thematic focus and may not be what investors expected.
   
4. Additionally, we have always suggested caution against investing in sectoral and thematic funds owing to their high concentration to a single sector.

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